AOF Outlines future in Merger with Aust Unity Diversified Fund

The responsible entity (RE) for AOF believes that a merger with the Australian Unity Diversified Property Fund will be in investors’ best interest providing exposure to a larger, more diversified portfolio, with an enhanced ability to execute upon value-add opportunities.

The proposal fundamentally changes the nature of the Office REIT and investors will be asked to approve the deal in a resolution to be decided on the 10th December 2021.

In July this year, the RE for AOF announced that it had concluded its strategic assessment of the REIT and determined that a merger with Australian Unity’s Diversified Wholesale Fund was likely to be a compelling proposition.

The REIT has been the subject of several proposals in recent years, likely the result of AOF being a medium size pure play office fund, with limited unit price liquidity arising from a concentration of unitholders on the register.

US Giant, Starwood were the first to present a proposal for the REIT in 2018 equal to $2.87/ unit. That offer was rejected and 6 months later (June 2019), Abacus & Charter Hall acquired a 10% interest and made an offer of $2.95/unit, which was subsequently improved to $3.04/unit and approved by the Board of the RE of AOF (October 2019).

In accepting the proposals many of AOF’s investors felt that the capital gain tax issues on the disposal of the assets eroded their value and as such there was little support for the takeovers.

AOF’s major investor, Hume Partners increased their interest to 9.5% causing Charter Hall and Abacus to offload their 19.9% interest but still half-heartedly proceed with the takeover offer without a direct interest, ruffling the feathers of ASIC in the process.

Starwood seized upon the opportunity and re-entered the auction with another bid at $2.98 (January 2020), however the onset of COVID19 brought a halt to all of the action. AOF’s unit price fell to a low of $1.50 and whilst recovering to around $2.80/unit in June 2022, the REIT since announced valuations falls and a proposal to merge with the Diversified Fund, taking the stock back down to around $2.32/unit.

In my mind, merging with the Diversified Fund takes AOF off the target list for takeovers, or at the very least, removes players in the market looking for a take control of a pure office REIT, a proposition which often extracts a highest price for unit holders. But the highest price is not always the best outcome.

The Board of the RE are required to look to the best interests of the unit holders and have considered the capital gains tax issues and other matters which the existing unit holders raised. The Board now support the proposed merger and have issued an Explanatory Memorandum setting out why they believe the merger should proceed including;

• increased sustainability of income and enhanced medium term income prospects;
• enhanced ability to execute value-add opportunities;
• exposure to a larger and more diversified portfolio;
• expected increase in, and sustainability of, distributions;
• increased relevance and liquidity with potential inclusion in additional ASX and global indices;
• a new debt facility and improved access to capital; and
• experienced management team guided by a majority independent board.

AOF engaged KPMG Corporate Finance to assess whether the offer is fair and reasonable and and concluded that the proposal is in the best interests of unitholders (in the absence of any other offers).

If the merger is approved, the new AOF will hold a diversified portfolio of 18 real estate assets with a valuation of approximately $1.2 billion across office, multi-use office and industrial, convenience retail, infrastructure retail and industrial sectors throughout Australia. The portfolio will also have a significantly longer WALE of 4.9 years and higher occupancy at 97% as compared to AOF on a standalone basis.